A safe asset's real value is insulated from shocks, including declines in GDP from rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a...

A new options-pricing formula applies to far-out-of-the money put options on the overall stock market when disaster risk is the dominant force, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. In the applicable region,...

A safe asset is one whose real value is insulated from shocks, including declines in GDP associated with rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the specified process for GDP and cannot be altered by the creation of safe assets. Therefore, in...